Out-of-court settlement as an efficient mechanism to restructure debt and overcome corporate insolvency

The out-of-court payment agreement is an agile and totally extrajudicial process that allows overcoming situations of business and individual insolvency as an alternative to bankruptcy proceedings.

In essence, this out-of-court procedure proposes to creditors the restructuring of liabilities through proposals that may include, among other mechanisms, reductions and waivers of the different debt items, all without losing the necessary confidentiality of the process, or the control over the daily management of the activity.

Having passed the first six months since the Covid-19 pandemic was officially declared, we can affirm that we are facing an extraordinary economic situation, from which a liquidity crisis may arise in the short term at all levels of our business fabric, as soon as the aid granted in the form of the ICO during the first wave last April runs out. Unless the Government or our administrations surprise us with the adoption, in the coming weeks, of relevant decisions that will allow SMEs and the self-employed to access rapid financing with guarantees of continuity, we can affirm that now is the time to take a stance on the imminent future, adopting preventive decisions to prevent a one-off liquidity crisis from becoming irreversible.

In this sense, the out-of-court payment agreement emerges as an agile and efficient out-of-court solution that allows the continuity of the business activity, without having to resort to insolvency proceedings or other judicial procedures provided for in the insolvency law, which are much more costly in economic and reputational terms.

The out-of-court payment agreement, which was introduced by Law 14/2013 on support for entrepreneurs and their internationalisation, was initially created as an out-of-court mechanism that professionals, freelancers, sole traders and small companies could use to solve their insolvency, without having to go through court proceedings. Only its frustration led to the declaration of insolvency of the person or entity, although the whole process was simplified because it was understood that the debtor had already, in some way, made an attempt to restructure its debt outside of judicial control -and its connatural stigmatisation-, with the help of an expert called an insolvency mediator. Subsequently, in 2015, the aforementioned out-of-court procedure was renewed to broaden its subjective scope of application, thus including the so-called consumer debtor, and instituting the mechanism as a quasi-prescriptive phase prior to the subsequent and desired Benefit of Exoneration of Unsatisfied Liabilities, commonly known as Second Chance of the individual debtor. It is in this context that the procedure has become known to a sector of the population and the different legal agents, since, as we have said, the insolvent debtor must resort to it in order to subsequently gain access to the eventual consecutive insolvency proceeding that will open the door to the exoneration of his liabilities.

However, the practice of our speciality in this area of law allows us to affirm that it is a mechanism for overcoming business insolvency that is largely unknown to businessmen, who are mostly surprised by its existence and its benefits. With the entry into force on 1 September of the Revised Text of the Insolvency Act, the out-of-court procedure has been relocated and systematised in articles 631 and following, and in the following lines we will outline its main characteristics, with the aim of making it a little better known, advising its use as a suitable and preferential mechanism available to thousands of small business owners faced with a situation of reversible insolvency.

First of all, we must emphasise that it is a procedure that is processed, coordinated and managed by the entrepreneur himself, his trusted advisors and a third party expert specifically appointed for this purpose, called an insolvency mediator. As there is no judicial participation or publicity regarding the insolvency situation manifested by the businessman, it makes it possible to continue with the normal business activity without any inconvenience other than the lack of solvency itself. During the course of the procedure, there is no judicial intervention in the accounts or activity, and this is relevant in that it neither hinders management nor stigmatises the manager of the business activity.

In order to access the procedure, different requirements are demanded depending on whether the debtor is a natural or legal person, being common in both cases the fact that they are in a situation of current or imminent insolvency. In the case of natural persons, it is sufficient that the estimated total liabilities do not exceed 5 million euros; while for legal persons, the liabilities or assets must not exceed 5 million euros or the number of creditors must be less than 50, and they must prove that they have the necessary resources to meet the costs of processing the process.

Likewise, negative requirements are also imposed, prohibiting access to debtors who have been convicted in a final judgment for crimes against assets, the socio-economic order, the Treasury, the Social Security, workers’ rights or false documentation in the last ten years; those who have reached an out-of-court payment agreement, a judicial approval of a refinancing agreement or have been declared bankrupt in the previous five years; those who are negotiating a refinancing agreement or those whose application for bankruptcy has been admitted for processing.

The procedure is initiated by filing a standard application for the appointment of an insolvency mediator, which must include, among other things, an inventory of assets and rights, a list of creditors and the annual accounts for the last three financial years for debtors obliged to keep accounts. The application shall be filed before a notary, in the case of individuals who are not entrepreneurs; or before the commercial registrar or the chamber of commerce of the debtor’s domicile, in the case of accesses in which the debtor is an entrepreneur, whether an individual or a legal entity. Said application, with all the attached documentation, shall be sent to the insolvency mediator, who will be in charge of the whole procedure, once he has been appointed and accepts the position.

Secondly, we must highlight its speed of execution, given that once the insolvency mediator has been accepted, all of the debtor’s creditors must be summoned to a meeting which must be held within a maximum period of one month (if the debtor is a natural person who is not a businessperson) or two months (in all other cases). The purpose of the Meeting to which the creditors will be summoned is to vote in favour of an agreement proposal, which allows for delays of up to a maximum of 10 years, debt write-offs, the conversion of the credits into other types of financial instruments (e.g. into participating credits, shares, etc.) or the assignment of assets or rights to the creditors as payment of the debt.

In order to obtain the debt modification measures, the proposal must be approved by a number of creditors holding at least 60% of the claims against the debtor, with 75% being more advantageous. It should be noted that the amounts owed to creditors under public law, with whom an instalment or deferral of the debt must be agreed, and the amount of claims secured by collateral will not be counted towards this quorum, except for those who, despite having collateral, decide to adhere to the proposed agreement. In this procedure, unlike what happens with the agreement approved within the insolvency proceedings, all credits that may be linked to the agreement, including labour credits and/or those that may be held by related parties such as partners, administrators or group companies, may vote and their credit will be taken into account for the determination of the quorum necessary to declare the agreement approved.

If the agreement is reached with the minimum percentages indicated above, the agreement will bind all debtors (except for public law claims and those secured by collateral that have not adhered to the agreement) regardless of whether or not they have voted in favour of the agreement. Their claims shall be deferred, remitted or extinguished as provided for in the agreement. Creditors who have not accepted or have expressed their disagreement with the agreement will also be affected by the terms of the agreement, although they will maintain their rights against those jointly and severally liable with the debtor and against their guarantors or guarantors. Creditors may not initiate or continue executions against the debtor for debts prior to the opening of the proceedings and the cancellation of previous attachments made for credits that are affected by the agreement may be requested.

If an agreement is not reached with sufficient support or if the debtor fails to comply with the agreement reached, the insolvency mediator must request the competent judge to initiate consecutive insolvency proceedings, provided that the debtor is still in a situation of insolvency. However, it is possible that during the AEP process, despite not achieving a sufficient percentage to approve an AEP that can be extended to the creditors who have not voted in favour of it, this process helps to conclude individual agreements with a sufficiently significant number of creditors to enable the company to emerge from insolvency and avoid the consecutive insolvency proceedings.

At AddVANTE we have a team of expert professionals to advise on both the out-of-court payment agreement procedure and a possible insolvency proceeding.